Citigroup Projects 65% Lebanon Haircut in Favorable Scenario

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Lebanon may write off two-thirds of its Eurobonds, and a fifth of the local debt, once it overcomes political differences hindering an economic overhaul, Citigroup Inc. says.

The prediction comes as wrangling between government factions, banks and businesses, as well as the fallout from a deadly blast in Beirut, sidetrack the nation’s efforts to fix an economy already in disarray.

So dire is the situation that Citigroup analyst Michel Nies says his projections are based on a favorable outcome and can hardly be called a base-case scenario. The risk of a “seriously adverse” situation that worsens the problems continues, he says.

“It is not clear that it is more likely than not that a solution is achieved,” Nies said in a note to clients. “Even if such an outcome were to materialize, the range of possible outcomes, and hence the set of possible values for each variable, would be large.”

Read: Bank of America Says Lebanon Targeting 75% Haircut on Eurobonds

Here’s a roundup of Citigroup’s assumptions for an orderly outcome, backed by an overhaul plan and debt restructuring:

20202021202220232024
Real GDP change-23.8%+6.2%+2%+3%+3%
Annual inflation185%45%45%8%5%
Year-end LBP exchange rate4,3006,4007,4008,0008,300
Debt/GDP186.9%132.8%116.9%108.5%101.4%
  • Sees a 65% haircut on foreign-currency debt and a 20% write-off of local notes
    • “In theory, a haircut on local-currency debt would not even be necessary to avoid default, but we doubt that international creditors have appetite for (further) Modern Monetary Theory-style experiments.”
  • Sees initial devaluation of the Lebanese pound to 4,300 per dollar, followed by another period of strong depreciation
    • Forecasts exchange rate of 8,300 by end-2024
  • Expects an agreement with the International Monetary Fund on a loan deal this year, even if such an outcome is “highly uncertain”
  • The debt/GDP ratio may fall below 100% with inflation eroding the value of local-currency debt

©2020 Bloomberg L.P.

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